In the world of cryptocurrencies and crypto trading, you’ll eventually come across the phrase market capitalization, and while those experienced in stock market trading might be familiar with the term, seeing it through a beginner’s eyes and without much financial background may leave you confused.
You might ask yourself: “What does cryptocurrency market cap mean and how does it affect my cryptocurrency of choice? Is it just a fancy term that analysts fling around in order to sound smarter than everyone else in the room, or is it a real and important part of crypto trading?”
In reality, when all is said and done, market capitalization is not that complicated, but it’s definitely important. Keep reading to find out more about crypto market capitalization, what it means, how it’s calculated, and more.
What Are Cryptocurrencies?
Before we delve into the concept of market capitalization, we should start with the basics. Cryptocurrencies are cryptographically secure digital or virtual currencies. They cannot be falsified or double-spent due to their trustless design, wherein multiple network peers need to confirm the validity of a transaction before it’s recorded on the blockchain. Speaking of which, most of these currencies are built upon blockchain technology, a digitally distributed ledger that works on a network of computers.
One of the greatest features of (most) cryptos is that they are completely decentralized. What that means is that they are not in full control of any central authorities like banks and governments. Instead, they operate independently and their value is determined by their users and market demands.
The first crypto that operated on a blockchain is Bitcoin, a coin that remains first in popularity and value for over a decade after its initial release. Today, there are numerous cryptocurrencies with different functions and values: some of them are clones of Bitcoin, while others offer brand-new features in the crypto ecosystem.
What Is Cryptocurrency Market Capitalization?
There are many different cryptocurrencies out there, like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH), etc., and each and every one of them has its own market cap. In simple words, crypto market capitalization is an important metric used to figure out the performance and value of a specific cryptocurrency.
Market capitalization shows how successful or unsuccessful a cryptocurrency is on the market and it’s calculated with a really simple formula.
First, you take the current price of the crypto, then multiply it with the circulating supply of that crypto, and the result you get is the market cap of the selected cryptocurrency. A disclaimer for the total market cap is that you should monitor the total number of coins in circulation, not the actual total number of mined and yet-to-be mined coins.
As an example, we’ll invent our own altcoin and call it Netaltan. Let’s say that the market value of one Netaltan coin equals $200 and that there are 2 million netaltans currently in circulation, though there are 10 million available for purchase to the general public and yet to be mined.
So, when we apply the market cap formula, we multiply the total circulating supply with the price of the coin. If we have 2 million coins * $200 per coin we learn that the market capitalization of Netaltan is $400M.
These market cap numbers only present the asset’s performance, presence, and value on the market. Any variation in value will sharply affect its market capitalization. There are numerous websites where you can access cryptocurrency market caps at your convenience, such as Coinmarketcap, Ycharts, and Coingecko.
Market Cap vs. Investments in Crypto
The market capitalization value should not be confused with the amount of fiat currency that’s actually invested in a selected cryptocurrency. Below are a few explanations and examples.
When a crypto coin is mined, it’s not immediately bought by market investors. For example, let’s say that 300 Netaltan coins have been mined, out of a total possible number of 2 million coins, but only 5 are bought at the value of $100. In this case, the total cryptocurrency market cap will be $30,000, but the total amount invested in this crypto is still only $500 (5 coins x $100). If you’re a beginner investor, you should take note of this to prevent a costly mistake.
The crypto market is extremely volatile. If the price of the crypto went up by 2,000%, it doesn’t mean that it is equal to a 2,000% increase in investments. This only means that the market capitalization has ascended, while the amount of fiat money remains the same, or has increased only slightly.
In other words, a crypto’s market cap is not a really good estimate of the value of a given cryptocurrency. As an example, an increase in Bitcoin’s price would increase the market capitalization and investors will liquidate their assets in order to crystallise their gains. What could actually happen is that the sudden increase in supply and decrease in demand could cause a massive crash in the crypto’s price.
Why Is Market Capitalization Important?
When compared to traditional assets like company stocks with different share prices and regular cash, cryptocurrencies are decentralized, unregulated, and extremely volatile. This means that the supply of coins on the market is regulated by the community, or more precisely, the miners. Thus we can conclude that the market cap could be used as a standard measure for the presence of a given cryptocurrency on the market.
This can all be traced back to the formula: the market cap equals the current price multiplied by the circulating supply. The higher the number of circulating coins on the market, the more prominent the cryptocurrency is. This is why the market cap is used as a standard to measure the popularity of a given crypto on the market.
The two most prominent cryptocurrencies in the world today are Bitcoin and Ethereum.
How Are Cryptocurrencies Classified?
The following classifications can show us how much of a risk we could be undertaking when investing in a certain cryptocurrency.
Large-cap companies have a large market cap and are considered safe investments. In order to be classified as large-cap cryptos, they need to have a market cap of over $10 billion. Based on recent information, only Bitcoin (BTC), Ethereum (ETH), and Ripple (XRM) are considered large-cap currencies.
If you decide to invest in this type of cryptocurrency, you should not expect your investment to grow rapidly. It will be considered a safe investment in a less volatile environment. Even though you might not receive some immediate high gains, your investment will have a slow and steady growth.
Mid-cap cryptocurrencies have a smaller market cap than large-cap ones, and they also carry a greater degree of risk. The cryptos with a market cap between $1 billion to $10 billion are considered mid-cap.
Mid-cap cryptocurrencies have more growth potential when compared to large-cap. This is the reason why they are higher-risks investments. The main reason for their growth potential is that they may be in a stage of increasing their market and utility, and they have not yet reached their full potential.
Some examples of mid-cap cryptos are Bitcoin Cash (BCH), Ethereum Classic (ETC), Monero (XMR), and EOS.IO (EOS).
Small-cap cryptocurrencies have the smallest market cap value, and thus they bring the highest possible risk. Their chances of failure are much greater when compared even to mid-cap cryptos. Currencies with a market cap under $1 billion are considered small-cap. Some examples of small-cap cryptos are Tron (TRX), ThorChain (Rune), Avalanche (AVAX), and Kusama (KSM).
Owing to their small market cap, these cryptos could drown in the market on a whim. You may see your latest investment in these coins drop to meager cents in seconds. You may ask yourself, why should I invest in these risky cryptos? The answer is because of their great potential for growth. Remember, with high risk comes high potential. Their value may skyrocket and bring you back enormous returns on your initial investment, although the risk of price drops is higher too.
Can Market Caps Be Manipulated?
Market caps can be manipulated by controlling the price of the crypto. Some cryptos may offer expensive coins and a large total circulating supply, which would make their market cap high. However, their actual worth may be far less than what would come out when you make the calculation as a speculative investment due to the fact that only 10 coins have been sold, for instance.
This frequently occurs with small-cap cryptos that have low trading volumes and low circulating supplies. These manipulations cannot be exactly classified as scams because this is the nature of small-cap cryptos: there’s a greater risk and there’s a greater reward. This makes it easy for someone to manipulate the price up or down by investing a couple of thousand dollars.
A Few Words Before You Go…
Hopefully, we’ve brought you up to speed on the meaning and importance of the crypto market cap. Cryptocurrencies are highly volatile and their values change almost daily. If you are tired of playing with buying an indefinite number of shares in companies in the traditional way, now you can choose another market to invest your money in – the crypto market.
Whether it be a short-term investment in small-cap currencies or a dive into large-cap cryptos at their current market price is up to you. Two things are for certain though: these new digital assets are a great investment opportunity and they bring a breath of fresh air to the entrepreneurial world of investing.